Tennant in Common - Problems with Inheritance Tax?

Bluefusion

My Parents were looking to set up a Discretionary Trust to help lessen the blow of Inheritance Tax.

From my basic understanding with a Discretionary Trust everything needs to be split between my parents 50-50, so they have separate savings accounts etc and regarding the house they have to change it to Tennants in Common.

The idea is that on the first parents death, 50% is transfered into the Discretionary Trust, of which the surviving spouse still has access to and this safe guards the house for them to live in.

Then when the last parent passes away their 50% share and the 50% share in the Discretionary Trust are then transfered to the Children as two separate amounts, thus reducing the liability of Inheritance Tax that would be paid.

Now in theory this sounds a perfect solution, but I have heard that IF a parent needs to go into a home then they can be forced to sell their 50% share of the property to pay for the care?

Can anyone advise.

elliebean_2

First of all, let me say that nobody can be forced to sell their home to pay care home fees. However, a charge can be placed against a house towards fees, but only in certain circumstances.

Secondly, tenants in common is still a better way to preserve the value of your property against care home fees than owning it as joint tenants. If one parent has to go into care and the other spouse is still living at home the house is disregarded. The only problem comes if the second spouse dies or needs to go into care. If the second one died, and they owned their property as joint tenants, the whole property would transfer to the person in care and the charge could be placed against the value of the whole property instead of just half of it, which would be the case if they owned it as TIC.

So severing the tenancy has double benefits. It enables your parents to set up Nil Rate Band Discretionary Trusts in their Wills and also protects some of the value of their property should one or both need care in the future.

Robert_Sterling

I will post a reply later this evening.

elliebean_2

Also there was no mention of a discretionary Will Trust as far as I can tell. Would this have been a separate document or a special way of wording in the Will?

This is not a separate document. The Trust provisions should have been in the Wills themselves.

Had things gone according to plan would both parents have done Discretionary trusts or just one of them?

The Trusts should have been in both Wills as nobody could know who would die first.

Would this bring the situation totally back to what my parents originally paid for and get maximum IHT reduction?

It should bring them back to where they should have been in the first place with IHT savings.

EdInvestor

The cost of long term care is probably best met by adding together

a)the indivdiual's state pension/pension credit
b)attendance allowance paid by the Govt
c)an immediate needs annuity paid for by a lump sum which guarantees the cost of the care for life.Providing the annuity is paid direct to the care home, the money is tax free.

Cost of immediate needs annuitiues

If the person is very old (which is quite usual) when s/he goes into care, the cost of the annuity will normally be much lower than the value of the house, thus leaving a considerable chunk for the heirs after the annuity is bought.

If this procedure is followed, the council won't "take the house" and the person going into care can choose the care home, rather than being pushed into the cheapest and nastiest (and farthest) one the council can find. And the relatives have peace of mind that the council won't come back to them later for more money ( because they can do this).

This is one area where the annuity idea has real merit.

Robert_Sterling

In many cases a "Deed of Variation" is useful.
In simple cases the beneficiaries of a will can agree to a variation.
You have to initiate this within 6 months of the death and get it sorted within 2 years of the death.

If the home is owned as "Tenants in Common" then the whole property passes to the surviving partner. The deceased partner cannot leave it to anybody in the will because technically the property is owned by a trust of which the partners are the beneficiaries. After the death of the first person the remaining partner is the beneficiary and can leave it to somebody in a will.

N.B. A "Tenants in Common" property cannot be passed on in a will.

I have recently changed from "Joint Tenants" to "Tenants in Common"

I got, for £8.50 via the internet, a template of a "Notice of Termination of Joint Tenancy". My wife and I each handed one to each other then put the two of them with our wills.

I then phoned the Land Registry and asked for form RX1
It arrived by post about 18 HOURS later.
I then asked the Land Registry for advice on how to fill it in.
I returned it to them the same day.
They got it the next day and posted a document to me.
I got it the next day.
66 hours from start to finish.
i.e. 3pm monday to 9am thursday ( today)


Phenomenal efficiency from the Land Registry.

Potential saving of £114,000 IHT

Next april it will be a potential saving of £120,000

In view of the large saving you might well decide to take legal advice on this matter.

N.B. This is what I have done. This is not Legal Advice.

elliebean_2

If we do the Deed of Variation and Discretionary Will trust, does that mean the surviving spouse is effectively re-writing the original Will so doing a new Will?

That's right, providing all beneficiaries agree, it is in effect rewriting the Will of the deceased.

Would the beneficiaries of the trust have to pay income tax until death of surviving spouse?

If the surviving spouse borrows all the assets from the Trust there will be nothing in the Trust except a promissory note.

jennifernil

Does this apply over the whole of the UK? We are in Scotland and would like to do something like this. We already have wills, made about 10 years ago, but the solicitor who prepared them never suggested anything like this.

elliebean_2

I thought if it was joint tenancy that the property passes automatically to the spouse.
I thought TIC route meant that surviving partner has 50% and the other 50% dealt with according to wishes via the deceased Will.
Have I even misunderstood this aspect too?

That's right. If you own your home as joint tenanst it passes by survivorship outside your Will, but if you own it as TIC you can leave your beneficial interest (usually 50%) to someone in your Will.

elliebean_2

jennifernil wrote:

Does this apply over the whole of the UK? We are in Scotland and would like to do something like this. We already have wills, made about 10 years ago, but the solicitor who prepared them never suggested anything like this.

Also bear in mind that succession law in Scotland is very different to England and Wales. In Scotland certain people have a right to inherit certain proportions of your estate.

Sting_2

some interesting points here:

http://www.thisismoney.co.uk/tax-advice/inheritance-tax/article.html?in_article_id=414027&in_page_id=78